With the supply chain representing the second biggest expense on hospitals' balance sheets1, the need to eliminate waste and gain efficiencies is constant. However, most organizations' current supply chain infrastructure fails to support waste-reducing efforts and poses a significant drain on hospital finances. As reimbursements shrink and hospital margins continue to tighten, the need to evolve the hospital supply chain to more accurately meet demand is more pertinent than ever before.
According to Steve Thompson, Director – Patient Driven Supply Network, at Dublin, Ohio-based Cardinal Health, principles and processes that allow the manufacturing industry to increase efficiency and reduce waste can be effectively applied to healthcare, such as Toyota's lean methodology and Kanban, a system that pulls inventory as it is actually needed.
Mr. Thompson, a certified Lean Six Sigma Master Black Belt, has been with Cardinal Health since 2006, but he has more than two decades of manufacturing and supply chain management experience in the automotive sector.
Here, Mr. Thompson took the time to answer Becker's Hospital Review's four questions.
Note: Responses have been lightly edited for length and clarity.
Question: Talk to us about the concept of a "pull" vs. a "push" demand signal.
Steve Thompson: When you think about traditional material requirements planning, many people do demand planning based on a forecasting model. This model has been taught in the supply chain for years, but unfortunately forecasts are often wrong; demand is frequently at odds with what your forecasts say you need.
One thing we've learned from lean methodology is that we tend to manufacture and plan based on convenience instead of what's actually used. We have a massive supply chain in healthcare that is generally based on this model — where we build it and ship it — and hope it all gets used. But we know already that a lot of supplies expire, or become obsolete and we end up throwing a lot away. We need a model that will actually allow us to replenish supplies based on [true demand].
The older "push" model says, 'I will push the network and fill hospital store rooms and supply closets and hopefully all this stuff will get used before it expires.' However, in today's economic model, no one has the extra money to spend the capital on supplies that are just going to go bad – let alone the space to store it all.
The "pull" model says, 'If you make a hole, fill a hole.' In a pull model, supplies are replenished for exactly what is used and with consideration for the most logical unit of measure. Today, more people are trying to use pull systems, such as those that use Kanban. However, if all you're doing is using the pull system to inform your MRP, then you're still sending outdated information back to the supply chain. Really effective pull systems have visibility throughout the supply chain so demand is visible in real time.
Q: Why is the change to a pull signal important to hospitals, distributors and manufacturers?
ST: The funding model is changing and hospital reimbursements are being compressed. Instead of chasing dollars, hospital leaders could be looking at where they are actually spending it. Hospitals spend a lot of money in the disconnect between the supplies purchased and those that are actually used. Supplies in total — including consumable goods, devices, implants, etc. — represent 30 to 35 percent of total spend2, the second-largest cost after labor on the balance sheet. From a hospital standpoint, supply chain leaders must be able to get their hands around pull demand signals if they are going to compete in the new world.
For distributors, to know when something actually gets used allows us not only to react to it but to also start building models so we start to understand what that variation looks like. There's always some level of variation, but we want to be able to know what "normal" looks like versus special or unusual costs. We can build our systems to replenish hospitals based on what those demand profiles look like and then manage the individual changes that are outside of the normal.
The manufacturers are working from the information they get from distributors and providers. There is a lot of variation — which is often really driven by standard packs or order methodology — that doesn't exist. For instance, a hospital may require eight of a certain item per day, but because the item comes in packs of 20, as a manufacturer or distributor we don't see it as eight a day, we see it as 20 every second or third day. The closer distributors and manufacturers can get to what hospitals actually use every day, the better the entire supply chain can respond to it.
Q: Why is this change to a pull framework becoming more important?
ST: Two reasons. First, it comes down to basic costs. We know reimbursements are being squeezed and hospitals are looking for help anywhere they can get it. [The pull framework] represents a great untapped resource. With it, we can perform better as an entire supply chain, not just pieces along the continuum. We never had the impetus to do it until now; this is the time.
Second, the pull framework is based around the concept of incredibly accurate product visibility at the point of use. Through advancements in technology, we now have technology, enabled by RFID, which allows us to capture the point of use demand signal and share the signal throughout the continuum of care through a robust cloud-based analytics platform… from patient bedside back to the manufacturer. TO me, it’s exciting that technology and strategic thinking about best way to anticipate demand are converging at this point in time.
Q: What can the healthcare industry learn from other industries that have already adopted this type of thinking related to demand signals?
ST: First and foremost, we can learn where the truth is, and the greatest source of truth is where something is actually used. [With the current model], it’s nearly impossible to know what demand really looks like. Obviously, no one wants to run out of supplies, yet studies have shown that hospitals spend more than $36 million per year on wasted orthopedic hip and knee implants3. That contributes to a $5 billion per year loss for the healthcare industry4.
Our supply chain doesn't begin and end on our receiving and shipping docks — it's a living thing. In my mind, the change we need in healthcare is the ability to access information that is relevant in real-time that will enable us to make insightful decisions. We really are fundamentally changing the way we do replenishment and supply. We need to move the entire platform to pull systems. The outcome will be a significantly improved experience for our customers, and their patients, and it will allow us to do better within our existing infrastructure.
1 Hospital Costs in Context: A Transparent View of the Cost of Care. Massachusetts Hospital Association, April 2010
2 Ibid
3 Michael G. Zywiel, MD, Slif D. Ulrich, MD, Arnold J. Suda, MD, James L. Duncan, BS, Mike S. McGrath, MD, and Michael A. Mont, MD, Incidence and Cost of Intraoperative Waste of Hip and Knee Arthroplasty Implants, The Journal of Arthroplasty Vol. 25 No. 4 2010
4 PNC Healthcare, GHX Quantitative Research Study, August 2011